5 levers that procurement can pull to mitigate inflation
All signals point to further supply chain cost increases as underlying inflationary pressures continue to grow due to ongoing COVID interruptions, energy and agricultural commodity price rises, and tight labour markets. As a result, central banks are withdrawing monetary policy support and starting a potentially long cycle of rate hikes to temper inflation and stabilise their economies.
In light of this, procurement teams should take advantage of technology and other levers to help their firms prosper in this environment.
Here are five levers you can pull to combat price increases and mitigate inflationary pressures in your supply chain.
1. Identify high-impact categories (with Spend Visibility) and make targeted plans
During a period of high inflation, procurement teams can use spend visibility combined with category knowledge to identify the parts of the business that are most vulnerable to inflation. Metals, energy, agricultural products, and other categories with prices tied to commodity indexes as well as other products that are currently facing supply disruption are likely to faces supplier requets for price increases.
To get on the front foot, category managers need clear visibility on what is being spent and how much, on the most impacted categories. The more detailed the spend analysis (for example, looking at departments or geographies with the greatest impact), the better-equipped teams will be to develop targeted strategies.
Once procurement teams have the spend visibility they require – they should focus on those categories with prices tied to commodity indexes, products with high commodity value, those with suppliers requesting price increases, and those where a price increase cannot be passed onto customers.
2. Consolidate suppliers to negotiate discounts
Many suppliers have already tried to pass cost hikes on to their customers, resulting in a slew of uncomfortable talks about cost, price, and value among even the closest of supplier relationships. While all organisations must exercise caution when negotiating with strategic partners, procurement departments can take advantage of the temptation of more business by aggregating volumes and negotiating lower pricing or discounts.
If price increases can’t be avoided, procurement experts may try to use vendor rationalisation to find other ways to get offsetting reductions, such as changing payment terms or implementing consignment programmes.
3. Take advantage of prompt payment discounts to help to offset price increases
Organizations should make every effort to pay suppliers on time and take advantage of any existing payment terms. Taking advantage of early payment incentives can help to reduce price increases. On a category and supplier level, use analytics tools to find and visualize payment term opportunities. Spend visibility also allows for the analysis of current invoice payment data and the detection of process issues that may be impeding early payment discounts.
4. Identify unnecessary spend
You have no control over the price of energy. But you can cut down on how much of it you use — and the same is true for almost every other category, product, and service your organization spends money on. This time of high inflation should serve as a turning point in terms of resource allocation and cost-cutting options. You can not only save money and limit the short-term effects of inflation by examining the things you spend money on, but you can also establish more efficient processes and operations that generate value and support sustainability initiatives for years to come.
5. Invest in technology and automation to free up talent to focus on the most strategic activities
To best control your spend, you'll need clear information. Procurement can employ a variety of levers to combat inflation, including visibility into supplier spend, categories, and payments. It can be difficult to get started if your spending and payment data is dispersed across multiple platforms and spreadsheets. Procurement processes can be streamlined using technology, allowing you to spend more time being strategic about your spending and less time on the data wrangling and manual analysis.
Inflation can't be stopped with a silver bullet. To handle the inevitable pricing shifts caused by global supply chain disruptions, a combination of analytical tools, strategy, and savvy procurement personnel will be required. The five levers listed above are effective instruments for developing a mitigation strategy. You can strengthen your organization's resilience against inflationary pressures by gaining visibility into your spending, negotiating and taking advantage of supplier terms, and identifying wasteful spending.
How can Robobai help?
Robobai's Spend Analytics platform provides increased spend insight to your organization by integrating, unifying, and analyzing spend data, enabling procurement professionals to make smarter decisions to keep spending under control during inflationary periods.
To learn more about how we may assist your organization in managing rising costs, contact us today.
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